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Finanace - Impact on Shareholders

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Please help with the following problem.

Currently a firm has $1 million in 10% debt. The firm also has 50,000 shares outstanding that sell for $40 each. The firm used the $1.0 million to repurchase stock, as they previously were an all equity firm. Three states of the economy are possible: a slump under which the firm would have operating income of $150,000, a normal state under which the firm will earn $420,000, and a boom under which the firm will earn $600,000. The firm pays 30% in taxes. Compare and contrast the current and previous structures for their impact on shareholders.

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Solution Summary

This solution helps with a problem involving the impact of science on shareholders. It helps compare and contrast previous structures for their impact on shareholders.

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Answer PREVIOUS STRUCTURE
slump normal boom'
operating income 150000 420000 600000
less:tax 45000 126000 180000
net income 105000 294000 420000
number of shares 75000 75000 75000
earnings per ...

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